The Best Way to Approach Equity Investing is to Move to Cheaper Sectors

Equity Cheap Sectors

Markets are rallying like never before. The confusion occurs about whether to stay invested in equity funds or whether it’s better to take a position in fixed income funds. Equity is that asset class that seems to be better for the investments for the next 10 years. The equity market within the near term is sort of a mechanical device and in the future, sort of a balance. After a 1-way move within the last one and half years, an honest correction may be expected at any time. 

Last decade there was a big deceleration in the earnings growth because of the non-participation of domestic cyclical sectors like banks, engineering capital goods, utilities, and infrastructure-related companies, which were hunting a down cycle. The predictions are it’ll have a big upward momentum where Nifty’s profit growth will be seen increasing

The Indian economy is riding and is on the verge of a major up move. Further, earnings growth acceleration is visible within the improvement of profits of domestic cyclical sectors like realty, capital goods, engineering, utilities, corporate banks, and a few of the big companies in refineries & telecom space. 

Whenever the correction happens, they are often as brutal as there’s plenty of froth built up in many stocks associated with digital, technology, and a few consumer-centric businesses. The simplest way to approach the market is to avoid these expensive sectors and move to cheaper sectors within the domestic cyclical space also as pharma formulations. 

Pharma may be a stable and defensive sector, where most of the businesses are currently trading at record low margins and are available at reasonable valuations. The sector witnessed a big downturn within the last five years, due to Food and Drug Administration observations &  warning letters and also the inclusion of varied drugs within the National List of Essential  Medicines under the Drug Control Order.  

Entering the world at a time when the trade cycle has already bottomed out makes it attractive and fairly good risk-adjusted returns may be generated over the subsequent five years. 

Secondly, pharma has also displayed huge business capabilities within the US moreover as emerging markets and India. Further, many good quality companies are cash-rich businesses that are resilient, as they are doing non-comprising discretionary spending. 

MyFinopedia can clearly see a turnaround happening within the pharma sector, where domestic growth may be to the tune of 11% to 13%, which is materially beyond the previous five-year average.